The Canadian federal budget is released today at approximately the same time people have to start thinking about taxes. While there is much speculation on what new tax measures will be introduced, theres been a corresponding ground swell of commentators questioning the utility of tax deductions and tax credits (a tax credit is typically a dollar for dollar reduction of taxes owing; a tax deduction is the reduction of a taxpayers liability in proportion to their tax bracket).
The argument is that tax deductions and tax credits tend to erode the fairness of the tax system. Since the deductions and credits are targeted at certain sectors, they are not universal tax relief to all. Some also argue that the deductions and credits are claimed by the very people who do not need them as much. A recent Globe and Mail article found that the childrens fitness tax credit is disproportionately claimed by people making $50,000 and over a year even though they constitute a minority of Canadian taxpayers. Time Magazine found a similar pattern in who claimed the mortgage interest deduction.
Finally, academics for years have attempted to determine why governments continue to rack up deficits. The findings cast no politician in a friendly light. Studies have found that: (a) government rack up deficit in order to increase re-election chances (patently obviously); (b) conservative governments rack up deficits if they know they are going to lose in order to constrain their opponents policy choices; and (c) an incumbent who knows it will lose will run a deficit to limit the successors choices so the incumbent can win in the election afterw0rds (there are some interesting articles on this topic here and here). Undoubtedly, tax credits and tax deductions are often used as tools for wooing voters and increasing deficits as a result.
The most touted solution to the government deficit problem has been a flat tax. The theory being there is less tax leakage in a flat tax system and revenues are easier to predict. The fear of the flat tax has always been that the rate will be set too low to fund programs (more of an issue in an aging society). The other proposal is to limit the increase in government spending in the years before elections; any increase above the cost of living allowance would require a super majority of the legislature or a referendum of the voters (in a minority government situation, the government would treat each budget as its last).
Regardless of where-ever you fall on the tax credit and tax deduction divide, this is the system we have and it appears that not enough people are utilizing tax credits and tax deductions properly.
Similar Posts:
- New Law Extends Tax Relief, Reinstates Estate & Gift Tax
- Federal deficit narrows in August
- Claiming the Small Business Health Care Credit
- Pros and Cons of Paying of Taxes with a Credit Card
- Practical record-keeping tips
